The idea of digital currencies, cryptocurrencies, and the blockchain is becoming more and more common with every passing day. However, the world has more than seven billion people and it will still require many years for everyone to know what cryptocurrencies are. Perhaps, you are someone who wants to know about digital currencies too. So, what is digital currencies? If this question is bugging you, here is the answer in great depth.
Understanding Digital Currencies in Details
They Are Truly Digital
Yes, they are truly digital. If you are wondering what Bitcoin looks like or the paper bill of Ethereum looks like, you are asking the wrong questions. These currencies do not exist in the real world. They are completely digital.
They are produced in the digital world and that’s where they are used. Yes, you can use a crypto coin in real life for purchasing tangible goods as well, but you will still be transferring the money digitally. You will not hand over some currency bills and call them cryptocurrency.
They Are Produced through Mining
The production of digital currencies is what confuses a lot of people. Just think about the mining process as the mining in the real world. People use resources to mine the digital coins and once they do it successfully, they are rewarded. Now, of course, the mining is being done in the digital world again.
It requires digital resources and digital problems to be solved. A miner has very powerful computers to solve difficult cryptographic problems. Solving the cryptographic problem is like finding a new piece of gold in the mine. People who use their resources to mine the digital coin get rewarded.
In most cases, they are rewarded in the form of new digital coins. For example, if you mine Bitcoin by solving a difficult puzzle using tremendous computer resources, your reward will be in the form of bitcoins. Hence, new coins are produced every time someone solves a difficult problem successfully.
The Platform in Use is the Blockchain
The blockchain is the underlying technology on which all the cryptocurrencies work. Think about it: if your currency is being produced digitally, kept digitally, and used digitally, then who is keeping the record of it all? When you do a transaction with the bank, the bank keeps the record of everything.
The movement of money in the real world is being recorded in one way or the other. Who is going to record the movement of digital currencies in the digital world? That’s where the blockchain comes in. You can say that the term “blockchain” is a fancy word for a digital ledger.
This ledger exists only digitally. A copy of this ledger exists on the computer of every person who has a digital coin. Every person on the network has the same copy of the ledger.
The transactions are being confirmed on this ledger in the form of a block. Every “n” number of transactions are recorded inside a block and then a new block is created to record other transactions. The number of “n” inside the block tells you the size of the block.
But who records the new transaction on the blockchain? Read the previous passage to know. That’s what miners are doing. They are the ones who solve a difficult puzzle to confirm a new transaction on the network and then record it on the existing blockchain.
Since every transaction’s copy rests with every person on the network, the idea is termed as decentralized ledger. Yes, cryptocurrency are decentralized i.e. there is no central power controlling them, their movement, or even the record keeping process.
They Exist within a System
Okay, digital currencies are real and they are here to solve real problems. However, the world does not accept digital currencies as valuable exchange units right now. You can’t go to your nearest vegetable seller, buy some cucumbers, and pay in the form of bitcoins.
While you are transferring valuable coins to the seller, the seller does not realize the value of them because he does not know where to use the Bitcoin that you are giving him. For him to find value in bitcoins, there needs to be a system in which Bitcoin has to be the accepted currency.
Think about a token that you might receive in a hospital for meeting a certain doctor for some time. Or the appointment confirmation receipt. This appointment confirmation receipt will work in the respective hospital but not anywhere else.
In simple words, the hospital for which you have the receipt of appointment to meet the doctor is the system in which that receipt has value. In a similar manner, digital currencies need to come up with a system where they have some value. That’s exactly what digital currency developers are trying to do.
They are joining hands with various financial institutions, retailers, and investors in the world to create a network/system in which their cryptocurrencies have value. For example, if you had a hospital in your town that accepted Bitcoin only, you would have a system.
In that hospital, the plastic or fiat currency you own does not matter. You can only receive services if you give Bitcoin there. So, you know at this point what the developers of cryptocurrencies are trying to do. Usually, they come up with an entire platform and a token that can be used on that platform.
On that platform or within that system, that token has value. The idea is to expand the system exponentially that it becomes a standard in the world and everyone starts accepting that particular token because they find value in it.
Hopefully, you have understood digital currencies at their core. Yes, the jargon used on the internet can confuse you. They start explaining the mechanics of digital currencies, which should not be the case because that’s not what attracts people towards a new idea. What needs to be communicated with people is the value and benefits of cryptocurrencies. You do not ride an airplane because of how complex its mechanics are, but because it takes you from point A to point B in less time than any other means of transportation.